Making Sense of the Soviet Trade Shock in Eastern Europe: a Framework and Some Estimates

Abstract

Eastern European countries have experienced sharp declines in real GDP since 1990. One of the reasons for this decline is the Soviet trade shock, deriving from the collapse of the CMEA and of traditional export markets in the Soviet Union. This paper is an attempt to quantify the magnitude of this external shock. A conceptual framework is developed to show that the shock has three distinct elements: (a) a terms of trade deterioration; (b) a market-loss effect; and (c) a removal-of-import-subsidy effect. Taking all three together, and also adding in Keynesian multiplier effects, the conclusion is that the Soviet trade shock accounts for all of the decline in Hungarian GDP, about 60 percent of decline in Czechoslovakia, and between a quarter and a third of the decline in Poland.